Japan’s Stewardship Code
Sep 11, 2014
As alluded to in a previous blog post, in recent history, foreign investors have desired to see improvements made to corporate governance in Japan. In order to address such concerns, several amendments were made to the Companies Act earlier this year, including a change to encourage the appointment of outside directors. Our blog article of August 18, 2014 details those changes. An additional measure, intended to improve the landscape has been the introduction of the Principles for Responsible Institutional Investors (“Japan’s Stewardship Code”) which draws largely from the United Kingdom’s Stewardship Code adopted in 2010. Building on our previous blog post, we thought it may be interesting to briefly consider the contents of the Code and its intended implications for the investment landscape and Japanese economy as a whole.
Japan’s Stewardship Code, which was drafted in accordance with the Japan Revitalization Strategy approved by Cabinet in June 2013, sets out guidance for institutional investors to fulfill their responsibilities to “enhance the medium- to long-term investment return for their clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge of the companies and their business environment.” It is hoped that this will develop and improve the profitability of the market and contribute to the growth of the economy as a whole.
The Code is not mandatory, but operates on a “comply or explain basis” (which is similar to the approach taken in the UK and to the appointment of outside directors in Japan). An institutional investor who accepts the Code is expected to publicly disclose their intention to do so on their website, along with other required disclosures such as their policy for how they will fulfill their stewardship responsibilities in accordance with the Code’s principles. Additionally, in recognition of the fact that the application of the Code should depend on varying factors such as the investor’s size and investment policies, the Code takes a flexible “principles-based” approach rather than a rules-based approach. Interestingly, both of these approaches may not be well known in Japan yet. The Principles Japan’s Stewardship Code is made up of seven principles as follows:
- Institutional investors should have a clear policy on how they fulfill their stewardship responsibilities, and publicly disclose it.
- Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
- Institutional investors should monitor investee companies so that they can appropriately fulfill their stewardship responsibilities with an orientation towards the sustainable growth of companies.
- Institutional investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.
- Institutional investors should have a clear policy on voting and disclosure of voting activity. The policy on voting should not be comprised only of a mechanical checklist; it should be designed to contribute to the sustainable growth of investee companies.
- Institutional investors in principle should report periodically on how they fulfill their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries.
- To contribute positively to the sustainable growth of investee companies, institutional investors should have in-depth knowledge of the investee companies and their business environment and skills and resources needed to appropriately engage with the companies and make proper judgments in fulfilling their stewardship activities.
In line with the Code’s expectations, the Japan Financial Services Authority has published lists of ‘signatory companies’. The latest list, published September 2, 2014, indicates that, as of the end of August 2014, 160 institutional investors from Japan and abroad had notified the FSA of their intention to accept the Code. It is widely considered that the implementation of the Code, which may be one of the first steps taken by the FSA with regard to responsible investment, has enjoyed success so far and is considered an important aspect of Prime Minister Shinzo Abe’s policy intended to increase foreign investment.